Business owners are likely to be distressed when a commercial mortgage business loan application is turned down and will be unsure as to why it took place and how to avoid a similar problem again. For each of the five primary reasons that a commercial lender might decline a commercial real estate loan, a practical solution is suggested for transforming the rejected commercial mortgage into approved business financing.

Two of the reasons (business plans and tax returns) will potentially impact all commercial borrowers. Many commercial mortgage loan officers will start their business loan review by stating some variation of "Can you show me your business plan?" and "We will need to see several years of tax returns."

Business projects are occasionally too unique for business financing via a typical commercial bank. In these circumstances (even if a borrower has an acceptable business plan and tax returns), it is not unusual to be declined for a commercial loan by a traditional commercial lender.

The reasons provided below do not represent obscure issues. It is likely that two or three of the reasons described will be important for typical commercial mortgage or business loan circumstances.

Reason Number One for commercial mortgage loan and business loan disapprovals: The commercial lender does not typically make commercial loans for the kind of business involved or imposes special conditions that make the commercial property loan impossible for the borrower. As one common example, fewer lenders are providing commercial real estate financing for restaurants and bars.

Similarly, auto service businesses are frequently given unnecessary (and expensive) environmental reporting requirements. There are many "special purpose" properties such as golf courses, gas stations, funeral homes and churches that most traditional banks will not include in their business lending portfolio.

Strategy Number One for converting the disapproved business loan into an approved commercial mortgage loan: For most business owners, there are reasonable commercial loan options beyond traditional commercial lenders.

There are results-oriented business lenders that will readily provide commercial real estate financing for special purpose commercial properties. The best commercial mortgage loan might only be available from a non-traditional business lender when traditional lenders won't offer the required business loan.

Reason Number Two for commercial mortgage rejections: Loan underwriters find something on a tax return that disqualifies a borrower under the bank's lending guidelines. This "something" will frequently be insufficient net income, but when business loan underwriters look at tax returns, there are many other possibilities which produce a similar result.

Strategy Number Two for converting the rejected commercial real estate loan into an approved business loan: Commercial borrowers will never have this reason to worry about if they have applied for a "Stated Income" commercial mortgage loan. Very few traditional lenders use a Stated Income process (no income verification, no tax returns, no IRS Form 4506) for a commercial loan.

Business borrowers should look for lenders using Stated Income business loans. This approach, however, will not work for all commercial loans due to a prevailing maximum loan of $2-3 million for typical Stated Income commercial mortgage situations.

Reason Number Three for commercial mortgage rejections: When a business is refinancing their current commercial mortgage loan and wants to get a large amount of cash out for various uses, it is not unusual for the bank to restrict what the funds are used for and to limit the cash to amounts as small as $100,000. Even though the bank might make the business loan, if they won't provide the amount of cash needed by the commercial borrower, this is equivalent to declining the loan.

Strategy Number Three for converting the rejected commercial real estate loan into an approved business loan: As noted above, there are other business financing options to consider. The borrower's objective is to use a commercial mortgage lender that will permit more cash out of a commercial property refinancing without significant restrictions on what can be done with it.

Reason Number Four for business loan rejections: The bank will not approve a commercial mortgage loan without collateral, typically as a lien on the commercial borrower's personal residence or other personal assets.

Strategy Number Four for converting the disapproved business loan into an approved commercial mortgage loan: Business borrowers should seek out commercial lenders that will not "cross collateralize" assets as a stipulation for getting business financing. This will result in more flexibility for the commercial borrower and preclude unwise (and unnecessary) connections between business and personal assets.

Reason Number Five for business loan rejections: A bank's loan underwriter or loan officer does not feel that the business plan submitted by the borrower supports the required commercial mortgage loan.

Strategy Number Five for converting the rejected commercial real estate loan into an approved business loan: Business borrowers should experience fewer delays and profit from dealing with a commercial lender that does not have a business plan requirement  due to several key benefits:

(A) Shorten the business financing closing period. Business plan preparation is likely to take 1-2 months or more.

(B) Reduce commercial loan costs by thousands of dollars. A common range for an average business plan (prepared to typical bank specifications) is $5,000 to $10,000.

(C) If a professional business plan is not needed, an approval for the business financing requires one less item.